Supplier Risk Monitoring

Debunking The Tier One Supplier Myth: The Importance Of Managing Risk Across All Supplier Tiers

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There’s a lot of research that shows supplier-based disruptions are much more commonly caused by subcontractors in the Tier One suppliers’ supply chains. This seems logical since most companies do significant due diligence on their major suppliers before signing contracts.

But there’s also a myth that grew out of this knowledge – that your big vendors are all stable and that you don’t need to monitor their viability and risk profile the way you do with smaller suppliers. Unfortunately, we know from many high profile situations that big suppliers often aren’t any more stable than smaller players. In the IT services world, Satyam was a large player that was brought down by senior executives acting inappropriately. In more mundane ways, EDS was a huge IT Services player yet suffered from performance problems and got acquired by HP and now HP struggles to keep its position in the services market. Even now, we see that Computer Sciences is splitting into two companies after years of trying to reclaim its previous success.

Most of the times clients face a disruption because of their suppliers, it’s not an obvious risk like financials, but something else like service maturity (suffering from delivery problems.) That’s why clients tell us they use models like Supply Wisdom because they can look at financial risk in COMBINATION with other risks like service maturity or people risk to see a better picture of threats that may come from their large suppliers.

In a very recent example, one supplier showed it was growing, having a solid Q2 financially. But digging into the revenue picture, its growth primarily came from existing customers. And at the same time, its people risk rose because attrition was higher and consultant utilization went down. This allowed the client to ask specific, pointed questions about how utilization fell while revenue rose, and in what areas was attrition rising. In short, this supplier was getting more money from existing clients, meaning some clients were becoming more important while others would become less important (because their spend was the same).

The combination of all those data points shows our clients that unless they were one of the clients increasing their spend with this supplier, that it was likely their account would face turnover problems and potentially delivery problems eventually. But they are now able to have detailed specific conversations with the supplier in order to understand if their account will be affected and to plan to mitigate against delivery and people risks.

It’s true that smaller players can be risky, but don’t forget that big players can often be just as risky – even more so, because it’s likely those suppliers do more work for your organization. Manage risk across all of your suppliers to protect yourself from disruptions and to take advantage of risk changes before your competitors do.